Office Market Analysis Western Cape
Contents Highlights 1 Summary & Statistics 2 Climate 3 Foreign Investment 5 Listed Property 6 Supply 7 Demand 9 Vacancies & Rental Rates 10 Prognosis 12 Office Market Analysis Western Cape Colliers International South Africa
Report Highlights Inflation falls within Bank's target ranges in August (Headline inflation fell to 5,9% inside the reserve bank target range of 3% - 6%) Interest rates on hold, good news for economy and property market Economic growth outlook revised down to 0,5% by Treasury Rand firms to nine-month high after local government elections US Federal Reserve keeps rates on hold Bank of England cuts interest rates to (0,25% from 0,5%) boost British economy after BREXIT vote Asset managers stand in the way of sate capture (Future growth) Moody s puts SOEs on watch (Moody s put Eskom, Sanral, the Industrial Development Corporation, PETRO SA, Land Bank and the Development Bank of Southern Africa in its crosshairs.) Trade deficit contracted Office Market Analysis Western Cape Colliers International South Africa
Brexit Analysis SA s reliance on foreign money to finance the shortfall on its current account makes it the most vulnerable in sub-saharan African to fallout from the UK s vote to quit the EU, Moody s Investors Service has said. SA s current account deficit leaves it vulnerable to short-term capital outflows amid changes in investors risk perception and appetite, Moody s vice-president and senior analyst Zuzana Brixiova wrote in a report released on early July. The extent of SA s integration into global financial markets including its investment and financial links with the UK, means it is the region s most exposed sovereign to the immediate financial sector fallout from Brexit. Africa s most industrialized economy depends on capital inflows to fund the shortfall on its current account, the broadest measure of trade in goods and services, putting it at the mercy of global investor sentiment. The deficit widened to 5% of GDP in the three months through March. SA s currency had initially underperformed most emerging markets after the Brexit vote, reflecting the economy s dependence on investors money and close links with the UK, Moody s said. More global liquidity due to reduced chances of a US rate hike and an expansionary monetary stance by the Bank of England could increase the likelihood of the rand stabilizing, the rating agency said. Brixiova also said, while SA would avoid slipping into a recession this year for the first time since 2009, and recovery would be affected adversely any increased risk aversion and reduced investor appetite towards emerging markets. The IMF cut its growth forecast for SA s economy to 0,1% from 0,6%. Low commodity prices and the worse drought in more than a century in SA contributed to a 1,2% contraction in GDP in the first quarter. Moody s left the country s credit rating at two levels above non-investment grade in May. Another view is that Brexit should be positive for emerging markets which benefits from increased liquidity as global capital is forced to search for higher yields. It is interesting to note that approximately $12 trillion is sitting in negative yielding bonds. For the risk averse paying a bank to hold your capital is better than the risk of losing it all. Offshore investors bought government bonds of R14,7 billion during June as opposed to outflows of R6,8 billion in the same period last year. Source: Bloomberg Office Market Analysis Western Cape Colliers International South Africa
Report Summary Summary Statistics Colliers International South Africa Office Market Analysis provides a brief overview of the key factors impacting the Western Cape office market and future prognosis for the market. The analysis focuses specifically on the Cape Town area and close surrounds within the Western Cape. Western Cape Current 200 140 9,5 7,6 10,5 8-10 Future 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook 6 month outlook 200 140 9,5 7,6 10,7 8-10 Office Market Analysis Western Cape Colliers International South Africa
Macro-Economic Climate South Africa s Economic Growth continued to mirror the effect of the massive slump in the Chinese economy that led to a global slump in commodity prices, which negatively impacted South Africa and in particular the mining and resources industry. The South African Reserve Bank has adjusted it's average growth forecast up to 0,4%, implying that South Africa is possibly avoiding recession. GDP has shown modest growth being led by the manufacturing industry which contributed 1% to GDP growth. The South African Reserve Bank (MPC) continues to hold interest rates steady, while many countries are looking at cutting interest rates to support their growth. This is in line with inflation targeting policy of the Reserve Bank. It s a juggling act between domestic inflation caused by weak currency versus slow growth of a failing economy. Structural impediments include: Constrained electricity supply, Poor education, Poor labor market flexibility, High unemployment, Significant inequality (leading to corruption) SARB Growth Forecast 0,4% 1.5% Normally interest rates should be coming down due to the weak state of the economy, but unfortunately this is not so. Government spending needs to be more subdued, to prevent the country putting itself at risk for further credit rating downgrades. The solution to South Africa s recovery lies in the addressing of the aforementioned structural issues and the short term pain will outweigh the long term suffering, unless these issues are not addressed. There is a positive spin on the general outlook and the potential for the local economy is significant. More than 60% of the population is of working age, and once unemployment and education are successfully resolved, the sky is the limit. The steady but persistent deterioration of South Africa s governance and institutional ineffectiveness, has been tested and found to be resilient. It is also counteracted by the conservative Fiscal and Monetary policies, and thankfully this prevents South Africa from a further economic ratings down grade (the final quarter will be telling). A further positive on the economy has been the decrease in the trade deficit for January and February, with a R 18,7 Billion trade surplus in May (all time high). Stable / rising oil prices and the reduction of imports, as well as an increase of exports resulting from strengthening commodity demand eased the pressure on the current account deficits. Inflation Inflation for was steady at roughly 6% (5,9% in August). Food prices look set to climb dramatically on the back of an unprecedented drought sweeping across South Africa s agricultural districts, this will put pressure on inflation going forward. Eskom s approved (/2017) 9,4% tariff increases will drive inflation higher. The Reserve Bank continues to use inflation targeting as its policy to determine the Repo Rate. CPI Inflation 6,4% Office Market Analysis Western Cape Colliers International South Africa
Rand vs USD Rand vs Pound Annual Property Escalations The Rand It is key to note that annual commercial property escalations are not necessarily linked to CPI inflation. At quarter-end, commercial property leases were (smoothed) between 8% to 10%, with office properties slightly higher than industrial. Tshwane generally exhibits a higher escalation rate than Johannesburg, Cape Town and Durban. (Tshwane average is closer to 10%) The saving grace is that the economic slow down has dampened the effect of currency depreciation on head line CPI. This means that the economy is doing so badly that manufacturers do not stock at higher imported prices unless absolutely necessary. The volatility of our currency gives major problem to investors, as they lack predictability in their financial modeling. Pound sterling has retreated against the rand in the period of, but remains volatile against the US dollar. Annual Property Escalations 8-10% Interest Rates An increase of 25bps in January and March saw the Repo rate at 7% at the end of the quarter. Prime bank lending rates ended at 10,5% with increases in January and March synchronized to the Repo rate. The MPC meeting in September kept the Repo rate unchanged. as was the case for the previous meeting. Further rate hikes are not expected during the last quarter of. 10,5% Prime Bank Lending Rates 7% SARB Repurchase Rate Office Market Analysis Western Cape Colliers International South Africa
Foreign Investment Currently European markets are the most attractive for South African funds to invest off-shore. In particularly currency depreciation prevents major foreign investors from buying into South Africa s listed property sector at this volatile point in time. Even if the rand has stabilized we may find foreign investment seeking better yields in Asia and other BRICS nations. Foreign direct investors (FDI) flow into South Africa nosedived by 67% to $1,8 billion for 2015 from $5,7 billion in 2014. has been slightly better than 2015 but with uncertainty investors have stayed away. Volatile currency, poor industrial relations and unpredictable government policy demands add heavily to economic uncertainty. The South African economy needs to move away from a traditional reliance on commodities. The political climate in South Africa and other emerging markets (BRICS) will have a direct influence on FDI flows into the country in the year ahead. Chinese investors might well seek a better return in Africa (South Africa). Currency volatility remains an impediment. CAPCO (Capital & Counties) October (BREXIT uncertainty) Hospitality Property Fund -50% 23% A Shares (Total returns ) Office Market Analysis Western Cape Colliers International South Africa
Listed Property Winds of Change Blow East A stagnant economy and a depreciating currency has ignited a new movement for the listed property sector to look East for better pastures. Particularly Central and Eastern Europe have seen extensive investments from the SA listed property sector. Targeted territories are Poland, Croatia, Montenegro, Romania, Czechoslovakia and Serbia. A major driver of this move is the ability to earn income in Forex but also the ability to borrow at very favorable rate in Euro and other currencies. Typically finance margins run at rates between 2, 5-4% and yields are recorded between 6 10% (Poland 6% & Croatia 10%). This movement was led by NEPI (New Europe Property Investments) an associate of Resilient which got a foothold in to Eastern Europe during 2008, and are currently a major stakeholder in the Romanian retail sector. This particular counter has appreciated of a rate of 850% from R 18,90 in April 2009 (listing price) to R 179,24 in May. That equates to 38% average growth per annum. Accelerate has announced its intention to acquire a portfolio of retail property in Poland and Czechoslovakia. Redefine has taken onboard a 49,9% share holding in the JSE listed Echo Polska Properties fund, further reinforcing the trend to take up offshore assets, as hedge against the rand Sirius Real Estate has further acquired 2 business parks in Germany to add to their exciting portfolio. Funds invested in the UK experienced turbulence after the announcement of the Brexit results, but are expected to stabilize going forward. With the Pound depreciation many UK funds may now look to South Africa as an investment destination. It is interesting to note that three rand hedge offerings count among the sector s top performers over a 12-month period: Investec Australia Property Fund (up 23%), Rockcastle (up 22%) and New Europe Property Investments (up 10%). Equites achieved total growth of nearly 19% in the nine months to September. Redefine Properties, an exciting performer managed a total return of around 22,35%. Redefine has performed well with strong deals in Australia and Poland. Variouss analysts feel that the listed property sector in SA has largely been affected by volatile currency fluctuations so any companies which have achieved returns because their underlying assets have done well. Office Market Analysis Western Cape Colliers International South Africa
Supply SELECTED WESTERN CAPE OFFICE DEVELOPMENTS UNDER CONSTRUCTION Development Status Completion Location Size Werksman Under Construction Q4 V&A Waterfont ±2,500m² Apex / Annex / Matrix Under Construction Century City ±16,500m² Grove Exchange Under Construction Q4 Claremont ±3,500m² KPMG Under Construction 2017 Foreshore ±14,500m² Citadel Under Construction Q4 Claremont ±6,500m² # 5 Silo Under Construction Q4 V&A Waterfront ±13,500m² Draper Street Under Construction Q4 2017 Claremont ±4,500m² Gateway Under Construction Q4 2017 V&A Waterfront ±6,000m² *above shows a selection of the Cape Town office developments currently under construction. This is a sample list, and not fully indicative of the market as a whole. Office Market Analysis Western Cape Colliers International South Africa
Demand The general economy is on a downward trajectory and all sectors are affected including office space. Businesses look for efficiency and are sensitive to total cost of occupation. Economic pressure means learning how to do more with less including the square meters in the office space. A continuing feature will be office space that is serviced by public transport, which is a key element in reducing parking expenses and time wasted in traffic, avoiding use of private vehicles. This economic climate causes Landlords and tenants to innovate with new models for occupiers. Tenants are cautious to enter new premises and prefer to renew and scale down existing space (sub-let s increasing). It also sees long term demand increasing in areas serviced by the Gautrain and other means of public transport. Notable new deals and renewals in the Western Cape from included, but were not limited to: ABSA Century City additional 4,000m² SSH Architects CBD, 11 Adderley 2,400m² Merchants Call Centre The District 2,400m² Merchants Call Centre Roggebaai 1,800m² Sekunjalo Convention Tower 1,700m² Levi Strauss Portside 1,300m² Office Market Analysis Western Cape Colliers International South Africa
Vacancies National Snapshot As at, the national office vacancy rate as recorded by South African Property Owners Association was 10,5% which is on par with the quarter before and a continuation of the broadly sideways trend of the last 5 years. This comes after a promising 60bps improvements in 2015 which was the largest quarter-on-quarter decline since 2008. While the vacancy rate is now 0,1% lower than a year ago, there still isn t a clear downward trend of the last 17 quarters, there were only 7 periods of positive net take-up. Pressure on profitability is seeing a renewed increase in A Grade stock and vacancies in this sector are likely to reduce over the next 6 months. At the closing a total of 788k m² was under construction, of which 85% fell within 10 office nodes in Gauteng (44% based in Sandton). 10,5% NATIONAL VACANCY RATE Office Market Analysis Western Cape Colliers International South Africa
Vacancies Rental Rates On a metro level, Cape Town performed well (quarter to quarter) by posting a 0,2% decrease in vacancy. It is noted that Cape Town still holds the lowest overall vacancy. WCVACANCY 7,6% rentals in the greater Cape Town area performed above initial expectations with all categories showing a growth in rental rates, A & B grade escalated at roughly 10% year on year and P grade at 6% year on year. With the economy remaining flat we expect rental performance to mirror that, and landlords will struggle to outperform inflation. Competitive market rates will insure vacancies remain largely in check. Despite a deterioration over the last quarter, Johannesburg still has the highest vacancy rate among the four major national metros. Sandton has a 4% vacancy for P-Grade office space and a rapidly increasing vacancy for A & B-Grade. Tshwane however, saw it s office vacancy rate increase slightly by 0,1% over the course of. Tshwane (9,3%) has the fourth highest office vacancy rate after Nelson Mandela Bay (14,1%), Johannesburg (11,7%), ethekwini (10,6%) among the five major national metros and with Cape Town showing the lowest vacancy at 7,6%. Grade P Grade A Grade B 2015 2015 2015 2015 2015 Average R190/m² Average R200/m² R185/m² Average R135/m² Average R140/m² R115/m² Average R90/m² Average R90/m² Office Market Analysis Western Cape Colliers International South Africa
Market Prognosis Modest signs of a market recovery were noted in Q1, and this recovery trend was predicted for a few quarters going forward. However the economic events of Q2 and had the effect of stifling those predicted growth trends. The most likely scenario is a stability phase where real growth is unlikely to be recorded in office rentals (operating cost and inflation may well erode profitability). Further absorption of lower grade office buildings into residential conversions in the CBD will contribute to stabilising of the office market in that area. Continued global depression in commodity prices and deteriorating growth in China as well as emerging markets (BRICS) has characterized the last quarter leading to a general lack of business confidence in South Africa, as well as fellow BRICS country's (except India). The weak currency will open an opportunity for certain global organizations to re-look at South Africa as a value driven destination (for selected business operations eg. Call Centres), the office market will remain flat as tenants seek value and landlords look to retain those tenants by offering discounted rates to renew leases. With landlords looking to secure longer leases and more favorable rates on offer, it has the effect of creating long term cash flow stability for investors. This is an ideal opportunity to acquire quality assets in preparation for the next economic recovery. Vacancy rates are becoming noticeably polarized between centralized and decentralized nodes. With centralized nodes attracting tenants to the city at the expense of decentralized nodes, it is expected that much of this will find residential conversions going forward. Report Sources Abland Alchemy Properties Atterbury Property Holdings Barrow Properties Business Day Live Colliers International South Africa Fin24.com GlobalRates.com Growthpoint Properties Investment Property Databank (IPD) Nedbank Redefine Properties South African Property Owners Association (SAPOA) South African Reserve Bank (SARB) Trading Economics Office Market Analysis Western Cape Colliers International South Africa
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